Tax memo: Proposed Changes for SIFTs, REITs and publicly traded corporations

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Deductibility of amounts paid in respect of stapled securities

On July 20, 2011, the Department of Finance released proposed changes to the tax provisions that deal with specified investment flow-through entities (SIFTs), real estate investment trusts (REITs) and publicly traded corporations. The legislation required to effect these changes will be released at a later date.

The changes include new rules that will apply in respect of stapled securities. These are the government’s response to recent transactions it views as frustrating the policy objectives of the SIFT rules.

The expression “stapled securities” generally refers to two separate securities “stapled” together in such a way that the securities cannot be transferred independently of one another.

In the case of corporations, equity and high-yield debt securities are typically stapled. In the REIT context, a unit of a REIT is stapled with the security of a taxable entity, such as the shares or debt of a taxable corporation to which the REIT rents its property. In both cases, a significant deduction is typically available to reduce the income of a taxable entity—interest on stapled debt, and rent or other payments to REITs. As explained below, the proposed changes are designed to limit the deductibility of these and other amounts.

The proposals will apply to amounts paid or payable after July 19, 2011, subject to a transitional period described below.

Other proposed changes to the SIFT regime relate to:

• excluded subsidiary entities;
• non-portfolio property of a corporation; and
• tax instalments.

The attached PDF includes a summary that assumes that the reader is generally familiar with the existing SIFT and REIT provisions.